SAN DIEGO, Feb. 02, 2017 (GLOBE NEWSWIRE) — PointPredictive announced today the publication of a white paper detailing new analysis confirming that auto lending fraud risk has been rising for several years, but remains hidden in credit losses. With 2016 auto lending originations soaring to historically high levels, the downstream impacts are now revealing themselves in higher fraud losses. PointPredictive estimates the annual value of auto loan originations that contain some element of misrepresentation may be as high as $6 billion in 2017, which is twice as much as 2016 estimates.
The white paper, based on analysis of historical loan performance across several different portfolios, reveals that auto lending fraud can be broken into three separate categories: known fraud that lenders have been able to identify, hidden fraud that ends up misclassified as early or first payment default, and systemic fraud perpetrated by unscrupulous car dealers or representatives at car dealers. Each of these categories is a significant contributor to the increasing fraud losses that we are forecasting for the auto lending industry in 2017.
“Our analysis revealed that hidden fraud is the largest category of auto fraud risk as it is often mistakenly categorized with all of the other credit losses,” says Frank McKenna, Chief Strategy Officer of PointPredictive. “Early Payment Defaults range between 1 percent and 3 percent of originated loans for a typical auto lender. We are finding that up to 70 percent of those loans that default on the first payment or within the first six months after funding have fraudulent misrepresentation in the original application. This is a primary contributor to the increase in auto lending fraud risk we are forecasting for 2017.”
Misrepresentation on the application of a borrower’s identity, income, or employment, as well as other key factors such as the price or condition of the vehicle, has a material impact on the performance of a loan.
“Credit scores or credit policies cannot be relied on to identify or prevent these losses, and identity scores only identify a small percentage of these types of misrepresentation losses. A predictive, full application fraud score is necessary to allow the lender to prevent a significant percentage these losses,” adds Tim Grace, CEO of PointPredictive.
The white paper also provides insight into the role that car dealers play in various ‘systemic fraud’ schemes. For most lenders, less than 3 percent of dealers are providing loans that are responsible for 100 percent of their known fraud and early payment default risk. Often, the frauds at these dealers can be traced to a rogue finance manager or other key employee embedded in the finance office that works with fraud rings or identity thieves to facilitate the delivery of fraudulent applications to lenders. On the positive side, more than 97 percent of car dealers represent very low risk to lenders as they have never been associated with a single instance of fraud.
To receive a copy of the white paper contact Kathleen Waid at [email protected].